New Jersey Property & Casualty Insurance License Exam — All Questions

Actual cash value (ACV) is most accurately calculated as:

• a.Replacement cost plus the cost of upgrades
• b.The original purchase price of the property
• c.Replacement cost minus depreciation✓
• d.The amount the insured paid in premiums

Actual cash value equals the current replacement cost of the property minus depreciation for age, wear, and obsolescence. It reflects what the property is actually worth at the time of loss, not what it would cost to buy new. Replacement cost coverage, by contrast, pays to repair or replace with new property of like kind and quality without deducting depreciation, subject to policy conditions.

A commercial building is insured under a policy with an 80% coinsurance clause. The building's replacement cost is $500,000, but it is insured for only $300,000. After a $100,000 covered loss, how much will the insurer pay before any deductible?

• a.$75,000✓
• b.$100,000
• c.$60,000
• d.$80,000

The coinsurance formula is: (amount carried / amount required) x loss = payment. The amount required is 80% of $500,000 = $400,000. The amount carried is $300,000. So $300,000 / $400,000 = 0.75, and 0.75 x $100,000 = $75,000. Because the insured carried only 75% of the required amount, the insurer pays 75% of the loss and the insured absorbs the rest as a penalty for underinsurance.

Under a named-perils property policy, the burden of proving that a loss was caused by a covered peril rests with:

• a.The insurer
• b.The insured✓
• c.The state regulator
• d.An independent adjuster only

Under a named-perils (specified perils) form, only perils listed in the policy are covered, so the insured must prove the loss was caused by one of those named perils. Under an open-perils (all-risk) form, coverage applies to any cause of loss not excluded, so the burden shifts to the insurer to prove an exclusion applies. This distinction is a core property concept and does not vary by state.

The purpose of a deductible in a property policy is to:

• a.Increase the insurer's exposure to small claims
• b.Guarantee the insured a profit on each loss
• c.Eliminate the need for coinsurance
• d.Reduce premiums and discourage small or frivolous claims✓

A deductible is the portion of a loss the insured pays before the insurer pays. It reduces premiums by eliminating small claims that are costly to process, and it gives the insured a stake in preventing losses. Deductibles do not guarantee profit and are a separate concept from coinsurance, which addresses the adequacy of the amount of insurance carried.

The clause that determines how a loss is shared when two or more policies cover the same property is the:

• a.Other insurance (pro rata) clause✓
• b.Coinsurance clause
• c.Subrogation clause
• d.Salvage clause

An other-insurance clause, commonly using a pro rata method, coordinates payment when more than one policy covers the same loss so the insured is indemnified but not overpaid. Each insurer pays its share based on the proportion of total coverage it provides. Coinsurance addresses whether enough insurance was purchased, and subrogation lets an insurer recover from a responsible third party after paying a claim.